January 15, 2013

Are All Your HNW Clients’ Assets Disaster-Ready?

New Jersey home damaged by Hurricane Sandy. (Photo: AP) New Jersey home damaged by Hurricane Sandy. (Photo: AP)

It was a once in 100-year storm, until the next one blew in the following year.

This statement certainly rings true in this period of unpredictable weather events. Mother Nature’s whims have been especially capricious of late, as anyone with a house or condo in the Mid-Atlantic region can attest. Not just homes along the Eastern shoreline are at risk to substantial damage, given headlines lamenting a higher-than-average wildfire season in the West, flash floods engulfing Washington, D.C., and tornadoes striking western Massachusetts, of all places.

Rare, calamitous weather events are problematic, but what about when they are less rare—as with Hurricane Sandy, which pummeled the Northeast a year after Hurricane Irene and a damaging Nor’easter? For high-net-worth individuals and families, catastrophic property exposures are a significant risk. Many people own second and third homes in areas providing aesthetic value, such as on beaches, along coastlines, in heavily forested mountain regions and in sunny California.

Unfortunately, these same locales are also subject to a broad range of natural disasters. Many high-value homes are vulnerable, as are valuable contents like art collections, jewelry, rare automobiles, antiques and fine wine, to tally a few. While a Ferrari submerged in water for three days and subsequently dried out may look fine, the sorry truth is otherwise.

Following the financial meltdown in 2008, many people diversified into different asset classes like real estate, given the depressed stock prices at the time. They also continued to invest in fine art, rare cars and other valuable collections, as the record prices at auctions attest. The convergence of these investment decisions and increasingly unpredictable weather events would seem to argue that affluent homeowners engage in deeper discussions about the nature and extent of their homeowners and other insurance coverages. Yet this is not always the case.

This point was made clear during a recent discussion with Adam Wolfson, president of Wolfson Insurance Brokerage, an insurance agency serving affluent clients from offices in San Francisco and New York. Adam pointed out that many people often rely on their banks for information regarding the insurance required to transfer physical asset risks, especially in situations involving a very expensive second home like a beach house.

“I’ve had prospective clients tell me after a major loss that their bank told them they needed flood insurance, but the most they could secure was the $250,000 maximum from the National Flood Insurance Program,” Adam explained. “They figured if this was all that was being required, that must be all they needed—a mistake. That limit is fine for a minor flood loss, but falls well short of what is required to transfer storm-related flood risks for a $5 million house.”

The agency routinely informs its clients that much higher limits of flood insurance for both homes and contents are required, often to their surprise. For non-flood risks, it helps that clients understand the need to insure the homes at full replacement value.

“People come to us scratching their heads after a loss, telling us they weren’t getting the advice they needed on what was proper coverage,” Adam said. “Those offering advice—in some cases, even their previous insurance agents and brokers—frankly were not well-versed in the needs of the high-net-worth marketplace. Every single home is different, as is every single location and every person’s financial situation.”

Adam’s point is that people in higher income brackets need to engage in discussions with specialized insurance agencies and insurance companies that can discern and evaluate their specific risks, and transfer these exposures via appropriate insurance coverage and financial limits. “It’s all about having someone in your corner asking the right questions—before buying the house,” he explained. “Was there ever a flood in the home before? Does it have a French drain? Is the generator powered by gasoline or natural gas? What do you do if the power goes out for an extended period? With today’s unpredictable storms, you have to think outside the box.”

One hopes this perspective is given the gravity it deserves in this marketplace and the financial advisory community. Mother Nature’s whims may surprise us today, but retrospectively they should also teach us.

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